[00:00:36]Darius Dale: Oh, always a pleasure to be with you guys, man. You guys do phenomenal work. I love the thought leadership you guys provide. Adam, Richard, and the rest of your team. Mike, all those guys. So just, thanks for having me. Thank you.

[00:00:45]Richard Laterman: Thanks for coming in. I guess before we jump into the conversation, just to remind everyone that this conversation is for information, hopefully entertainment purposes. Nothing we discuss here should be seen as investment advice. Seek a professional in your own jurisdiction that knows your circumstances for that. And with that, we can have a good wide range of conversation. Yeah. Darius, maybe paint a summarized picture of what today or what is very foggy today in trying to understand asset allocation, risk appetite. It’s, it seems like it’s a very confusing time for the average investor to say at least.

Foggy Asset Allocations

Real vs Financial Economies

[00:01:19]Darius Dale: Yeah, absolutely. I’ll start I’ll break it, in part, into the real economy and the financial economy. Sometimes they are the same. Sometimes they’d average, they always meet up. So with respect to the real economy, here in the US we think we’re on a path to recession. We’ve had the view since last summer that the US economy had a lot more juice and resiliency than the average investor realized. And therefore, we were going to have a much delayed start to recession in 2023, relative to investor consensus.

Recall that we came into the year with most … consensus, most investors expecting like a first half recession, second half recovery. We came into the year thinking that a recession, the highest probability outcome would be Q4 of this year. When we look at the rest of our models, the highest prob, the second highest probability outcomes is Q1 of next year. So we were, always knew we were going to be on this elongated path of recession.

Obviously figuring out markets is the much harder part in between now and then. Secondarily with respect to inflation, in respect to the US inflation, we know that, sorry, let me do the rest of the world’s growth in system inflation. We also came into the year with the view that the Chinese economy would have this sort of one time off, one time reopening impulse, but then level off from a growth standpoint.

There was not real, any real positive momentum like pent-up demand in the Chinese economy due to a lack of fiscal stimulus, and really the overhang of debt that they were dealing with in terms of their structural liquidity trap in 2019. Recall that’s what the Chinese economy was, on its knees in 2019.

It got Covid and reopening from Covid without stimulus puts you right back on your knees. And that’s the call we had on China. That’s been obviously working in markets. And then with respect to the European economy, just confirmed the recession, you’re still dealing with the lagged impacts of monetary tightening, not just in the European economy, but really for most major economies, with the exception of China and Japan.

Japan tightened a little bit and so that’s, in our opinion, that recession that we’re seeing on the tape in Europe over the medium term is probably going to get worse. Is probably going to have some market impact to the currency market because there’s some real inefficiencies in terms of how it’s currently being priced.

With respect to inflation, US inflation we know is the most lagging of lagging business cycle indicators. It typically breaks down in recession and through recession. And so the concept of, seeing any real evidence of getting back towards two and sustainably to 2% inflation, which is the Fed’s preferred target, it’s unlikely to, we do, we get any of that evidence until we get into the recession, which augmented our call that the Fed was going to stay more hawkish for longer.

They’ve obviously shifted a little bit in recent months, due to the regional banking panic. We don’t necessarily believe that is appropriate because when we study the inflation cycle here in the US and the concepts from the perspective of our statistical models, there’s really nothing in the time series that says we’re going to go to two and stay at two.

The time series is screaming, go to four and stay at four right now. And so I think we, there’s a little bit more work to be done either in terms of the Fed acknowledging that there’s more work to be done, or in terms of the bond market having a panic attack about the lack of work that is being done.

Either way it all leads to the same place, which is the Fed’s going to have to do more and they’re going to have to force the economy into recession and they might over, they’re likely to over tighten as a function of that secondary input process and a lack of understanding on inflation and understanding that it typically breaks down, well into the recession.

Disappointments

[00:04:18]Adam Butler: I didn’t mean to interrupt, but I was, I’m curious, have you been surprised at how quickly the Chinese and Eurozone numbers have started to disappoint? Like, they came to the party really late in terms of starting to get hawkish raising rates, trying to tighten conditions and certainly in the Eurozone. And they’re already showing like pretty substantially disappointing growth numbers. Totally. It looks like that caught markets by surprise too this week.

[00:04:43]Darius Dale: Yeah. So on China, no, I think we, we pretty much outlined our view on China very specifically and very accurately.

Europe, yes. Very surprised at the speed with which the European economy has rolled over. In response, obviously it’s monetary tightening, and most importantly in Europe there was still a lot of fiscal stimulus, whatever in the pipeline, whatever that means. I’ve been doing this for 15 years. I still have no idea what that actually means, but that’s what, that’s one of the things people were saying, right?

There’s a lot of stuff people say on Twitter, whatnot. And allegedly there was a lot of fiscal stimulus in the pipeline, but it’s obviously not showing up at a time where you would expect it to show up, which is obviously with the Eurozone economy in recession. Real retail sales are tracking down two to 4%. Pick your economy.

And so that’s that was a surprise in terms of the speed with which you’re caught up, because I think one of the biggest implications of this is this sort of mismatched pricing in the currency market. In fact, I have a slide on this, I can share my deck. Yeah. One of my favorite slides, one of my favorite charts in all of global macro right now is this sort of, this imbalance that we’re seeing in terms of money market pricing.

Can you guys see this slide here at 48? So what I’m showing in this chart, the blue lines in these panels show the terminal policy rate for the Fed, ECB, Bank of England and the Bank of Japan. The red line shows the floor policy rate, so you know, where is the policy rate going to be out to two years.

We’re looking at the OISS curve in terms of the minimum value, so the maximum value on the last curve, and the minimum value out to two years. And so as you can see, we’re pretty much right around the same place in terms of floor policy rates for the US and the Eurozone. But the reality is the terminal rates for the US and the Eurozone are way off, which ultimately means they’re calling for the US to cut twice, almost twice as much as the Eurozone ECB is likely to cut.

And what economic outcome does that happen, in my opinion? I can’t, I can stay up all night envisioning an outcome, but that almost never happens in any real outcome. So to me, I’d really think about, has the currency market gotten ahead of itself in terms of pricing and dollar weakness and euro strength in recent months?

And our answer to that question is definitely yes in the context of what could be, when we hear next Thursday, which is a very different tone out of Madame Lagarde with respect to the ECBs outlook, in terms of fighting inflation. They may take the easy way out and say we’re in recession now. Let’s just wait.

Short-Term Preferences

[00:06:49]Richard Laterman: To what extent could this lack of signal or confounding signal be a function of a broken transmission mechanism from a single perspective, given this change in liquidity that we have between the TGA and the Fed, quantitative tightening, all these different dynamics that are at play? Is it perhaps the case that whatever signal is being drawn from the pricing of two years out is actually just capital allocation, not reflecting economic data, but rather, short-term preferences?

[00:07:20]Darius Dale: I think less, I think it may be a factor, but what I think is the dominant factor here is, if you notice the sort of trend in these floor rates, they went up and up and then we hit our terminal floor rate here in Q4 of last year. And we’ve been lagging since. We peaked around four and we’re 320 now in the US.

And so that’s the market. That’s the market basically saying, okay, this is the neutral rate. If you go beyond this, you’re going to have, you’re not going to be able to sustain this level of policy rate. And so that dynamic sort of happened in late Q1 for the Eurozone, right around 3%.

And then they’ve backed off towards 2.7%. I do believe the, that we could talk about this in more detail, but I do believe this, sort of this discussion around the likely liquidity rejection we’re going to see in the coming months, really, if a lot of it’s going to be concentrated over the next two months, specifically with respect to the refill of the TGA. I think that’s pretty well known and well telegraphed at this point. But also what is very unknown and very un-telegraphed and something that we’ve been focusing on in our research at 42 Macro is the general return of Uncle Sam to international capital markets.

In fact, I have a chart on that. I think it’s the next slide, which is yeah, so we … that we’ve been at the debt selling. So in this chart I’m showing the statutory debt limit here in the US, and the blue line, the red line shows the public debt subject to the debt limit. And as you can see, the blue line and the red line values have been the same since mid January.

And as a function of the blue line, the red value, red line value’s been the same since mid January. What does that mean? It means the United States the largest borrower in the world. The, at the top of the international capital structure has not been issuing debt on a net basis since mid January. And as a function of that, we, the global private sector, have not had to create balance sheet space to accommodate that.

And so it’s allowed us to speculate on other assets, go down, take capital, take credit risk in the fixed income market. Take equity, … of equity market, bitcoin’s up a lot, quote/unquote year to date. Don’t get me started on that nonsense, whatever the hell that means. But June 9th, what the hell does the year to date return mean on June 9th?

But anyway so that my key takeaway on this discussion is that, there’s going to be some indigestion associated with the 7% budget deficit that we’re just running and operating, which is by the way, a record budget deficit outside of recession, outside of war here in the US.

And ultimately what does it mean is, it means that quantitative tightening, which is quote/unquote going on in the background and has truly been going on in the background since mid-January. We’ll stop going on to the background. It’ll start draining bank reserves again as a function of the return of net coupon supply.

You’ve seen this, probably, chart from us before. It’s now it’s, it belongs to the people now, but our net liquidity model here, where we show the Fed balance sheet minus the TGA and the reverse super facility balance. And then we also subtract the emergency lending as well in terms of trying to get a true approximation of the net liquidity that’s being supplied by the federal government.

And the reality is that correlation broke down right at the beginning of the year, right when QT stopped draining bank reserves, and ultimately that correlation’s got to pick back up in the coming weeks.

Bills, Not Coupons

[00:10:02]Adam Butler: Were you surprised that Yellen announced that the vast majority of new issuance is going to come from bills and not coupons? Any insight into what they’re trying to do there?

[00:10:11]Darius Dale: Yes. I was surprised because it’s not clear that we have the kind of, we have the, so again, when we talk about inflation, one thing it’s very clear from our perspective is, we, I think we model inflation as well as most people on Wall Street.

And the reality is when you look at the sequential momentum in the inflation time series, this is what keeps me up at night as it relates to, not and has really thankfully, has really kept us out of being too long, too many bonds with the recession playbook on in recent months, is because we are compounding sequentially at four to 5% inflation on core PCE and consistently around 4% inflation on super core PC inflation.

There’s nothing in that time series that says the red lines, which are the year over year rates have changed the blue bars of the three month annualized growth rates. There’s nothing in the time series that says the red lines are going to two and staying at two. Eventually we think they will, if we were right on our call for the recession to commence some Q4 or Q1 of this year.

But the reality is we’re not going to see the kind of degradation of un-inflation that you typically want to, the Fed really wants to see, until maybe a quarter or two after that, because that’s the history of the US economy. Inflation is the most lagging indicator of the business cycle.

[00:11:15]Adam Butler: And I guess I was confused too because it seems aside from weakness in the labor market and weakness in services demand and a little bit of continued disinflation in rents, we probably need to see some disinflation in markets.

Animal spirits are an important component of spending patterns and this inflationary impulse, right? And I thought that maybe Janet would be more predisposed to issue more coupons, to take some of the air out of the, some of the oxygen out of this, for example, some of the AI bubble that we’re seeing, like stocks are getting pretty frothy again, right?

There’s a lot of that kind of speculative energy. I thought maybe more coupon issuance would be prudent to just deflate some of that energy and give the Fed a little tailwind in its mission, but instead they went bills and they left all that oxygen left in the system.

[00:12:06]Darius Dale: Yeah, you’re absolutely right. So we’ve tracked this pretty closely. If you look at the composition of bills versus coupons on a net issuance basis, TBIs accounted for 20% of net issuance in Q4 of last year, and they’re targeting a move towards 80% by Q3 of this year, a linear …. You’re right, they’re really taking the easy way out as it relates to refilling the TGA.

And this is, I think this is new evidence. Let’s think about this from the perspective of market participants in future liquidity cycles. This is a signal to us that they don’t want to use this as a policy tool, the TGA. They’d rather not use it as a policy tool. It’s literally, exactly, it’s an emergency measure, or it can be used as an emergency measure to save off debt-selling drama. But the reality is, it’s clear that they don’t want to use this as a policy tool. They’d rather center the policy back on rate hikes and QT and the reality is, so it was just a happy coincidence starting to interrupt, but just, it was a happy coincidence that the draw out into TGA helped attenuate some of the effects of quantitative tightening in the last couple of quarters.

As the TGA was being drawn down the negative effects of, from a liquidity standpoint in the markets were somewhat dampened. yeah, by the T-bill drawdown. And I guess that’s going into reverse. So this was not a coordinated treasury and fed policy, but rather a happy coincidence.   That’s your. Yeah, it’s the, for, we don’t know. The reality is no one on FinTwit or on talk, no talking head knows. They can have a very colorful narrative. And Danny Kahneman says, be careful of those colorful narratives. Most people don’t know. Danny is watching us.

I’m just realizing, Google Danny Kahneman, if you don’t know who that is, very important person. And yeah, I, what I think is really just happened is, it was just a coincidence of events, right? Like we hit the debt ceiling in January. That was when we were supposed to hit it and they had to draw it down. The process, the negotiating process obviously in DC took longer than I’m sure Janet Yellen would’ve preferred to. I don’t think this woman prefers to be in the news. She seems like a very kind, meek old woman. I don’t think she wants to be in the news in the middle of global financial markets.

So I think it’s more coincidence than anything. And I think, again this move to replenish the  TGA with primarily bill issuance, is a pretty clear signal that they don’t want to use this as a policy tool to … monetary policy any further. Don’t forget, the house view is that there are some regional banking crises going on.

Yeah. That is going to effectively tighten monetary policy for the Fed, which is BS in my head. To me, here’s why it’s BS. Isn’t the whole point of monetary tightening to push through tighter credit conditions through the banking sector so that they can push through tightening credit conditions in the real economy. When that happens, you can’t say it’s an additional policy tightening, it’s just the reaction to the tightening you’ve already done.

[00:14:32]Adam Butler: Yeah, exactly. It was what you intended to achieve in the first place. Totally. Yeah, totally.

Banks – A Slow Moving Crash

[00:14:37]Richard Laterman: But it’s structurally going to be changing the credit availability and once this downturn inflection, and we’re not, and then we’re worse again into a more positive cycle, this is definitely going to be affecting, as you see, this is a slow moving type of crash. But it seems like the regional banks are in some deep trouble and there’s probably going to be some consolidation in the banking system to some degree. So it’s likely going to be affecting, there’s going to be a second, perhaps third order effect to this whole bottom.

[00:15:05]Darius Dale: Yeah. But looks very benign to me. I’m showing in this chart here, so Yeah, I agree with you, Richard. But it’s, I would be, I would’ve been much more concerned if we were talking at the beginning of April. And the reason I say that is because what I’m showing in this chart is total assets on small banks. That’s any bank outside of the top 25 and total assets, there’s about 4,700 banks in the US.

So you can imagine there’s a lot of these institutions. And at the beginning of April, you know what had been a consistently, positively, a 2%, three month annualized rate of change in terms of their total assets. It really shifted to like, down three really quickly. And I assumed in the beginning of April, I’m sure like everyone else did, including the Fed, that down three would turn into the down 7, 8, 9, 10 in the coming days, coming quarters, And very, it’s very much not.

We’re literally a quarter since the regional, the beginning height of the regional banking crisis. And we are at compounding at minus 1.9% in terms of their total assets. And more importantly, if you look at CNI loans, because to me that’s like the most economically sensitive aspect of their, of the lending portfolio. CNI loans at minus 2.6%. It’s in three month annualized growth rates. This doesn’t look like there’s a real credit crunch going on in the US economy, this looks like there is a tapping on the breaks of credit intermediation, but it’s tapping on the breaks in the context of like nominal GDP being, let’s call it four to 6%.

I don’t know, it doesn’t seem like it’s going to do much. So again I go back and the reason I made the statement I made earlier is because I’m very, we tracked this data on a weekly basis at 42 Macro. I don’t see anything that looks like the Fed’s going to be right in it’s view that this is going to equate to a couple more rate hikes. This looks like all the Fed hikes you’ve done already. That’s what I’m seeing.

Bond Markets and Inflation

[00:16:37]Adam Butler: Yeah. And we’re not really seeing it yet at all reflected in in break-evens, right? Like it’s amazing how sanguine the bond market is in the face of what is, what has been unbelievably persistent core PCE, any insight into why the bond market just continues to refuse to buy persistent inflation?

[00:16:54]Darius Dale: Yeah, so to me, this is the biggest question of our time. And quite frankly, I think that’s why we’re having the … bubble because I think the bond market is starting to figure out that this Fed may take the easy way out on inflation. Because the easy way out on inflation is, the way out on inflation is, I think we might have over tightened. Let’s stop now, hope for a soft landing, and magically inflation’s going to get to 2%. That has never happened in the history of the US economy. There is no time serious history of core PCE breaking down substantially ahead of a recession. In fact, you actually tend to need to go through the recession to get core PCE down significantly, in fact.

And so we typically decline on a, we decelerate on a median basis, 82 basis points in core PCE, in recession. This is going back to 1950s when the time series started, we decelerated an additional 36 basis points. So you can expect to see somewhere around, on a median basis, inter distribution, 120 basis points in core PCE deceleration.

When you’re talking about going through a year after the recession concludes, we haven’t even started the recession. So you’re talking about sometime in 2025. If we decelerate, if the recession starts today, we’re going to get to three and a half percent core PCE a year, sometime in early 2025. That’s not acceptable.

And this is an issue for the bond market, because what I’m showing you in this chart here, is probably the scariest chart of macro if you’re a fixed income investor, is probably the most bullish chart in macro if you’re an equity investor, because it means there’s going to be flows out of the fixed income asset class.

Incremental flows out of the fixed income asset class. And I don’t, I’m not making that call yet, but I will make that call if the Fed starts to get real cute about the soft landing BS, because it is BS. There’s no history of inflation doing what they say it’s going to do outside of a recession, ever in the history of the US economy.

So getting back to this chart, what I’m showing in this chart our term premium, it’s an extremely wonky, esoteric, fixed income expression. It’s the, to explain this in kind of layman’s terms, it’s the additional rate of return you might get, or it’s the premium or discount you might get for locking up your money for in, in the units of time, as opposed to rolling over the TBI for the same amount of time, for how long it takes.

So instead of rolling over ten one year TBIs, what, just, what’s the premium you get instead of doing that compounding versus just putting your money in a 10 year Treasury? And right now you’re basically paying the Treasury department to, for the safety and security of being able to lock in someplace so your money’s somewhere safe for 10 years.

And that premium, that discount is minus 66 basis points. So you’re paying Uncle Sam for the privilege of holding a 10 year Treasury. And right now, if you go back to the 1970s, late 1960s when the last inflation war began, we were, pretty much felt like a negative term premium back then, which was B zero.

And over time it just climbed and climbed because the Fed was too easy with respect to its willingness to do what it takes to do whatever it takes to get the inflation gene back in the bottle. Ultimately, we took, it took Paul Volker taking interest rates up to 20 something percent to get term premium, to start to reverse that.

And that process, and the reason term premium and inflation is climbing, it’s not because it’s pricing in more inflation. What it’s pricing in is the volatility and economic forecasting. Don’t forget, bond prices are composed of their nominal expectations and the, and then the risk premium. This is the risk premium component. It’s hard to forecast growth and inflation when inflation’s high. We’ve done a big statistical study on this with data going all the way back to the 1800s that shows when inflation, the higher inflation goes in terms of quartile and inflation volatility, the higher realized and nominal economic growth go in terms of their respective quartiles of volatility.

That’s a, that’s an issue for the bond market in terms of this starting point. It’s almost priced to perfection in terms of the soft landing outcome. And then secondarily, Adam the blue line in this chart shows inflation expectations. So at 2.16% on the 10 year, it’s even more priced to perfection.

Like it’s one way, and so this is my concern, this, there’s a lot of investors out there who are in a similar camp as us. Maybe not in the same timing because I think we’ve been right as rain on the timing of the expected recession. But I think we all, many investors share the view that the US economy is headed for a recession.

Many of them have full maxed-out allocations to fixed income. And I’m not sure bonds are done going down, because again, I think that either the bond market is going to wake up to a Fed that is hoping for a soft landing, and I guarantee you a soft landing, at least based on all the historical evidence, is a hundred percent back test.

Soft landings in the economy equate to soft landings in inflation and the bond market might start to sniff that out. And if the bond market starts to sniff that out, that’s gonna be pain obviously, but it may cause the Fed to actually have to chase the bond market higher. Who knows? I just don’t know if it’s appropriate to be max long fixed income, yet I think we’re gonna get a opportunity to buy fixed income, amid some of this liquidity reduction this summer, but I don’t think we’re there yet.

Policymaker Equivocation and Light Switches

[00:21:21]Adam Butler: So we may be facing a sustained period of policymaker equivocation, right, where they flip dovish too soon, the bond market panics, they’re chased, they’re forced to chase the bond market higher. And so you’ve got even more, you’ve got policy uncertainty then, on top of the sort of general inflation and economic uncertainty that you get when you’ve got sustained higher inflation rates, right?

How do you expect the equity markets to respond to that kind of outcome?

[00:21:51]Darius Dale: As long as we’re not in recession, you don’t have, the equity market doesn’t have to care. The equity market just cares about the flows, dynamics, and the liquidity dynamics. Liquidity’s not been great in the last couple of months.

It’s not as nearly as negative as it has been in 2022, but it’s certainly inflected a little bit. But to me, I think what the biggest driver of the equity market right now is sentiment and positioning. Clearly sentiment and positioning. The CTAs are making money in the seven stocks, and then most people are staring at the other 90 something.

And that’s kind of the, that’s the running joke on Wall Street right now. And I don’t know if that has to change, because when we go back and we look at our, the relationship between the business cycle and the market cycle, particularly in and around recession, the stock market tends, there’s a few STS out there, the folks, and they need to hear this. The stock market tends to peak, like, very close to the recession process or not very close to the recession. It’s very close to the peak in the employment cycle, so right now, on a median basis, if you go back and look at all the recessions, we have the unemployment rate data for US, so since World War II, the stock market has peaked on a median basis one month ahead of the recession, or, sorry, no, not the recession.

Sorry, I keep saying recession. One month ahead of the trough and the unemployment rate. Okay. So that’s something to note. And more importantly, stock market tends to gallop into the end of, into the end of the business cycle. The median return is plus 16% with an inter quartile range of 14 to 20, 20%.

There are no non-double-digit values in terms of the one year return leading up to the peak of the stock market, ahead of a recession. So it’s pretty consistent across history. Very sorry, not pretty. Very consistent across history to see strong equity markets leading up to a recession. And if you’re, and based on what I just said about the timing of the peak of the market, you could easily see, again, we’re calling for a dip here this summertime in, in the context of liquidity cycle dynamics I’ve highlighted, but I could easily see that dip being bought by discretionary managers who’ve got a chase performance into year end, chasing that dip, rallying this thing in October or December. And then that’s probably the final blow off top that we’re looking for to really get bearish and put some shorts on.

[00:23:45]Richard Laterman: And are rallied equities with a narrow, very narrow breadth, right? As you pointed out, seven stocks leading the charge. So is it historically the case that these bull off top, these melt ups, these end of party type of rallies are typically with a very narrow type of breadth in the market? Very few stocks, the mega caps beating the charge and everybody else floating or even down to this extreme degree?

[00:24:07]Darius Dale: No. But the breath is typically poor at the, late in the business cycle. You can just pull up a chart of S&P and Russell and put the recession bars on it.

You can always see the Russell peaks before the S&P, or Russell, Dow. It’s Russell, S&P, Dow, that’s how the process works and it’s generally consistent across business cycles. So you typically lose, and that makes sense, right? Like people think about a recession as this sort of alright, light switch, the economy’s in recession.

That’s not how it works. It’s what’s gonna happen is, between the three of us, whoever took on more leverage is probably gonna go into recession first. I’ll volunteer. I don’t do that, but I’ll volunteer anyway. And then Adam, maybe his wife spends too much, then they’ll go into recession. Then Richard. He’s a single guy. He is, he’s going then. He maybe even avoids the recession. But that’s how the process works. You think about this for companies as well. It’s not this monolithic, thing. It’s, some of us are more levered than others and some of us are gonna feel the pain and pinch of tighter monetary policy sooner, and more forcefully than others.

[00:25:04]Richard Laterman: Yeah. Yeah, hopefully my wife will hear that last part.

[00:25:05]Darius Dale: You’re a handsome guy. Assume you’re single.

Inflating Away the Debt

[00:25:07]Richard Laterman: I just wanted to ask you on the inflation side of things, is it possible that despite all the rhetoric, the Fed just sees allowing inflation to run a little bit hotter for the next few quarters, couple of years, as the easiest way to inflate away the real value of so much of this debt.

Do you see this as being a part of their plan that despite the rhetoric, they need to show a strong face against inflation to the public, especially from a political standpoint, but that this may be part of their plan or something that they are striving for, even if not openly, because of how it helps to deliver the economy to some extent.

[00:25:46]Darius Dale: Yeah. I would take it from a different perspective. These people don’t want to deliver anything. What about, what have you have? We wanted to go back and look at the fiscal response, the bipartisan fiscal response to Covid. But obviously Covid was a pretty special circumstance, but it was unanimous to just dump money on people and the economy with two different sets of Congresses, two different sets of folks in the White House, same outcome.

So I went back and looked at the total amount of public debt we accumulated from the end of 2019 to the end of 2021. So obviously, we got two Congresses, two Presidents, two White Houses in there, and it was like a very linear rise in public debt. It was up, we increased the public debt by six, 6.4 trillion.

The Fed monetized 3.3 trillion of it, in terms of outright Treasury securities purchases, not by the growth of balance by outright Treasury securities purchases. To me, what I think is happening is a more bigger, broader structural kind of change and shift in the public sentiment around debt, and around who’s gonna solve the society’s problems.

Is it, is the man, is the individual, the laborer responsible for solving their own problems? Or is it going to be the public sector? And I think we’re, the, this move towards populism that really started in 2009, right? We, populism’s not new, it’s just getting bigger and bigger as the problems for the common man have gotten bigger and bigger with respect to inflation.

Maybe some structural employment that might come out of AI? Who knows? I think this is gonna be a very interesting decade in that regard. But going back to your original question, Richard, to me it doesn’t seem like they want to inflate away. They don’t, they want to …, to me, it seems like they just want to solve problems and the way they solve the problems is to just lever up the public sector balance sheet.

[00:27:18]Richard Laterman: So, I could see that be…

Balance Sheets, Inflation and Marketing

[00:27:19]Adam Butler: I don’t know how you reconcile a constantly expanding fiscal balance sheet with low inflation, in two or three years. The two are completely incompatible. And if you look at the budget office forecasts, there are increasing deficits as far as the eye can see.

This is what is so baffling to me. There’s a clear demonstrable, causal and empirical relationship between fiscal deficits and inflation. Yeah. And we are getting larger and larger deficits, that both sides of the aisle have committed to them over the next decade or more. Where is this 2% inflation? How is this happening on a sustained basis without a massive, financial crisis?

[00:28:01]Darius Dale: Two percent’s marketing, Adam, that’s, it’s not happening. It’s marketing. Again, so I’ll, so I’m joking.

[00:28:07]Adam Butler: It’s not marketing, because that’s what the bond market is pricing.

[00:28:10]Darius Dale: Yeah, it won’t, it’s good marketing, that the bond market bought it, but I don’t think they’re gonna buy it when they get to the real, when we get to the other side of this business cycle, because again, we’re going to go to 2% inflation in a recession. The problem is, are we gonna stay at 2% inflation if the, the budget deficit right now, we have a record non-war, … budget deficit of minus 7.3% of GDP.

Like that, that to me, like we blew the budget deficit out to 9% of GDP or something like that in the financial crisis. We’re basically operating a financial crisis, fiscal proficiency right now in this particular moment. And it’s bizarre. It speaks volumes to, again, this kind of populism movement, which obviously means the Fed’s job is much harder in terms of getting the inflation genie back in the bottle.

And this is what I’m so concerned about in the terms of the bond market. Is the Fed gonna be credible and serious about whatever it takes to get to 2% inflation? Because it can happen if the, and I had a great call with our fixed income world, one of the world’s largest fixed income desks. And the head of the desk said to me, tip of the cap, because back in August, I said the neutral rate’s much higher than people think. And that they made a lot of money on that view. Not just, obviously they have their own team obviously, but, it was because one of the reasons we thought there’s a lot of cash in the economy.

If you look at checkable deposits, both in terms of the household sector and the corporate sector that’s about 3% of both of those balance sheets, up from 50 basis points. You got to go back to the 1960s to see this much cash on the private sector balance sheet, both household and corporate.

And so that’s one of the views that supported that view. And another reason we had that view is that, look the fiscal response is very aggressive. Like we’re talking about, back then it was like 5% deficit to GDP, and in a boom, what was a booming economy more or less. And that to me is, I think that call has very much come home to roost in the bond market.

But the reality is if they stay at it with this fiscal program in terms, and it looks like we’re very much gonna be at it, the debt ceiling for all the talk about the debt ceiling, they very, they barely did anything as it relates to the, out the structural fiscal outlook. You’re right. Like it’s, the Fed’s job is much harder and the Fed’s response to their acknowledgement, and responds to their job being much harder, it determines the … of the bond market. I happen to think long term they’re gonna take the easy way out, which is pivoting back to their employment mandate.

Right now it’s fashionable to anchor on the price stability mandate. But when the going gets tough, when unemployment’s three or four, seven or 5.7 instead of 3.7, that’s when they, the inflation mandate drops and they just pivot to something like 3% or three and a half percent. I don’t know what the number is, but obviously it’s very structurally bullish for things that aren’t bonds because it flows out of fixed income. It’s gonna be wild. But that could be a year or two away.

Pricing in the Premature Pivot

[00:30:40]Adam Butler: Are you of the same mind as I am about the fact that basically the equity market is pricing in a premature pivot, right? That the Fed is going to blink and they’re gonna let inflation run hot, or at least they’re gonna make noises about the fact that they’ve already done all the work they need to do and that inflation’s gonna come down on its own through some kind of, magic wand process. And the bond market is giving the Fed far too much credit that they’re 90% confident that the Fed is gonna stay strong, do what it takes in order to defend the currency, the value of the currency, and the real value of  debt securities.

And so you’ve literally got two different sides of the market pricing in two completely different tails. Like, how is that reconciled, do you think, from an asset allocation standpoint?

[00:31:25]Darius Dale: It’s, I think the bond market, they’re both gonna be right and wrong at different points. And in fact I think a month and a half ago I was, in one of our programs, I said both bulls and bears are gonna lose lots of money over the next three quarters. Bears are gonna lose money first because it’s too late to put the recession playbook on. The inflation’s gonna prove stickier, gonna prove more resilient.

And ultimately the positioning is on the short side of the equity market and the positioning on the max long positioning in the fixed income market. In terms of some allocators, it was gonna be shaken out. But then obviously you get to the recession part of that, that in a couple of quarters, then that’s when the, that’s when the bulls get shaken out.

So I think, again, both parties, bulls and bears are gonna lose a lot of money before the end of Q1 of next year, in my opinion, in both bonds and stocks. Yeah because the bulls who are long stocks now are gonna convince themselves that it’s a soft landing by year end and that’s when they lose a lot of money.

The bears who are long bonds now have not really reconciled this is, the Fed has not proven to be credible with respect to the longer term structure outlook for inflation. I think they’ve done enough to convince a lot of folks that inflation’s maybe potentially going back to 2%.

But if you’re actually doing the math on this stuff like I am here, 42 Macro, it just doesn’t seem like that’s gonna be the case. And ultimately, I think sometime in the next few months, it’s gonna become the case, in fact, to everyone, to mark a date on the calendar. August 10th that’s when we report July CPI.

It could be the case that inflation starts to re-accelerate again on a year over year basis in July, because we’re gonna lose a very difficult comp in June. And so food inflation starts to accelerate again, in July of this year. Again, that’s August 10th. We get that data point, bond market’s going to be limit down on that day.

Who knows, that to me is, it could be a very big buy. Might, most likely will be a great buying opportunity for fixed income. But I don’t want to be long fixed income into that because again, the Fed is gonna have to come out. If you want to buy bonds, the most bullish at, the most bullish thing you can do to buy bonds is a Federal Reserve that has taken a bat and beating the economy, just beating it and knocking it out and destroying nominal GDP.

The most bullish thing you can do as a stock investor, obviously, is buying an economy that the Fed is beating with the bat, at the low when the economy’s lying on the ground, bleeding. So it’s almost kind of two parts of the same process. And but going back to what you think stocks are pricing in, this is one thing we know and if we can go back to the chart on slide 37 here, one thing we know is that stocks have not priced in a recession.

So what I’m showing in this chart here are various market indicators that kind of give you a sense of where you are in the market cycle. They are bounded indicators. That’s why I like to look at them. They’re non-stationary. And, or sorry. They are stationary. My apologies. They are stationary. And what I’m looking at is what the peaks and troughs for these particular indicators, where they got to in previous recessions. The green dotted line corresponds to the 2001 recession. That was the shallowest recession in US history.

The orange dotted line corresponds to the 1990 to 1991 recession. That was the third shallowest recession in US history, driven by completely different dynamics. That was the energy shock. The green one was more of a CapEx burst. And then the, obviously the financial crisis, housing bubble burst, et cetera, is the red dotted line.

The blue dotted line is the mean for those peaks in each of those recessions. So this is the Goldman Sachs Financial Conditions Index. Top panel. We got investment grade credit spreads in the second panel, high yield credit spreads in the third panel. And the most important panel, in my opinion, in terms of, relates to the equity market, is the high beta, low beta ratio.

This is the ratio of the high S&P500 High Beta Index relative to the low BEIT Index. And why do we look at it that way? Because we know, in various points in the business cycle, it pays to be long high beta stocks, high beta securities, because they have more economic and operational leverage at certain phases of the business cycle. It pays to be long low beta stocks because, for exactly the same reason, they have less economic and operational leverage. And so as a function of that, they go, their earnings go deteriorate less even at the lows of last year.

A Loaded Question

[00:34:55]Richard Laterman: No, I was just gonna ask about, when we’re talking about the equity market pricing in a recession, or rather not pricing in the recession the way the bond market is. I think there’s an argument here that stocks are pricing in recession with the exception of mega cap, technology, right? Because when you think about the Russell, and when you think about the equal weight S&P, these are not performing, right?

These are not priced to perfection by any stretch of the imagination. And they’ve actually been struggling quite a bit. So this apparent divergence between the bond and stock market has a lot to do with this concentration of the mega caps for the S&P and particularly for Nasdaq. Do you see that? Because oftentimes, historically we’ve seen whenever there’s a big divergence between what bond markets are pricing, equity markets are pricing, equities are typically more susceptible to speculative mania and this sort of thing, whereas the bond market, I think is more perceived that the, as the smart money or the larger allocators and there’s more signal there, whereas there’s a bit more noise in the equity market.

But correct me if I’m wrong, it’s, it seems like maybe the broader indices are showing weaker equity performance than otherwise.

[00:36:02]Darius Dale: I, so you, that you, very loaded question Richard. There’s a few things that I want to touch on specifically, but just that your primary point that the market is priced into recession.

We are very much on the, in disagreement. We are on the other side of that boat respectfully. And the reason I say that, going back to this high, made a little bit ratio, is that, this ratio has not broken out of this sort of 1.5 to kind of 1.92 range this entire bear market or, whether you allegedly, we’re in a new book market this week.

But that’s neither, I don’t really care about that characterization. But the fact that we have not even gone to one, which is where we’ve gone in the last, few non- recessionary, cyclical slowdowns, we go through one. When you go talk about going to recession, we haven’t even broken out of this range yet.

And so it’s telling me that the sector and style factor dispersion in the equity market has not given a damn about the earnings outlook, has not given a damn about the cashflow outlook, about the margin outlook. Everything that’s happened in the equity market has been deflating the multiple and reflating the multiple, various intervals.

That’s all that’s been happening. And we’ve had a little bit of degradation in earnings and that’s caused some of the downdraft in other sectors and style factors. But in a recession, in a non-recessionary cyclical slowdown, this ratio goes to one. It’s at 1.7 right now and has not broken below 1.5 this entire process. So I, we would very much be on the, and this is, and where we come with this analysis. Go back to what Stan Druckenmiller said 20 something years ago, the late nineties. The best economist in the world, is the internals of the stock market and all the guys …, basis points at Citadel Millennium and Point 72, et cetera.

They know their companies better than we know anything about macro. That’s for sure. And for them to not price in a degradation in some of these higher beta, higher leverage securities tells me that recession has not been the primary concern. It tells me the primary concern has been about the changing liquidity conditions both to the downside last year to the upside from Q4 to Q1, and then back to the downside of the last kind of few weeks.

[00:37:50]Richard Laterman: Alright.

Data-driven Models

[00:37:51]Adam Butler: You are, if nothing else, a data-driven analyst. So I want to give you a chance to talk about your data-driven models, right? So one of the big ones I understand is your, you’ve got a Crowding model, you’ve also got a macro Weather model. Which of your models do you think is maybe doing the best job of capturing the major themes at the moment, and maybe drill down into what that model is suggesting, and then maybe we can touch on what the shorter-term kind of Crowding model is saying in, in terms of how to tactically position over the next few weeks relative to the next sort of six months and 12  months.

[00:38:26]Darius Dale: Yeah, great question. I apologize I don’t have the, our Crowding model in this particular presentation, but I can just give you some of the highlights. So in the past few days, we got bearish Crowding signals. Out of bearish Crowding signals, I take the other side of the trade. And in RSP that was equal weights, small caps.

Recall that, post that job report last week, we saw a big catch trade in the cyclical sectors and style factors. And then, so that the Crowding model basically snitched on that a couple days ago and said, hey no, stop chasing that. This is the time to be selling that stuff.

But again, that’s a very short term model. The, those signals tend to get resolved in a week or two, sometimes at most three weeks.

[00:39:02]Richard Laterman: But generally speaking, is it momentum driven? Is it sentiment driven?

[00:39:03]Darius Dale: The crowding? It’s positioning driven. It’s positioning driven. What we’re looking for are things that are on the short side. In terms of that model we’re looking for the expressions or exposures that have indicated a high RSI. They’re overbought and you’re seeing an extreme deviation, an extreme positive deviation in flows into the particular ATF.

And so that’s a, you get extreme positive deviation in flows. They have very high RSI, that’s obviously people chasing the highs, right? That’s a FOMO chase to the highs in so much, when we’re looking for long signals in that model, we’re looking for extreme negative deviations in flows, and we’re looking for a low RSI.

So you’re basically puking something that’s already oversold. You want to take the other side of that and supply liquidity to the market. And so that, that’s the genesis of that model. Our Weather model is our primary risk management tool that we use at 42 Macro. It’s the basis, it’s the foundational basis of our systematic portfolio construction process down here on slide five, Founding.

And what this system is designed to do is quantitatively score and create signal out of all the things that we know to be very influential to the market cycle, at various points of the business cycle. And I’ll start with the real economy. So the, we broke it down to sort of 10 principal components of macro.

The reality is, it’s probably only four or five that are truly really that impactful, but they all matter at various points in time, which is why we keep it in there. And so in the terms of the real economy cycles, we look at growth, we look at inflation, we look at employment, we look at corporate profits, we look at fiscal policy in terms of unpacking growth.

Our two indicators for growth, for the growth cycle are the OECD composite leading indicator that’s currently trending lower. So that’s the current signal there. The Bloomberg, we derive the next 12, the implied delta from next 12 month IFL or growth and inflation forecast, in terms of what they’re signaling.

And so we look, we’re basically saying, okay, is Bloomberg consensus, that Wall Street economists’ consensus is anticipating an acceleration of growth from today over the next year? Are they anticipating a deceleration in growth from today over the next year? And that number is minus 165 basis points. So that’s obviously negative currently.

So you get two down arrows in growth with respect to inflation. We’re tracking headline inflation. That statistic has more, it produces more dispersion across asset classes than all the other inflation time series. That’s the one the bond market tends to care about the most. And so that’s been trending lower, obviously, in terms of that next 12 month headline CBI delta. The implied delta, it’s also negative as well, minus 155 basis points.

So that’s a negative signal in terms of the unemployment cycle, unemployment rate at 3.7%. That’s been trending lower as we’re, basically right around a 50 year low thereabouts, in terms of the unemployment rate next to a month consensus unemployment rate delta. So we’re taking that same process, deriving what the, what Wall Street economists’ consensus believed the unemployment rate’s headed, over the next 12 months.

And they got it up 109 basis points. So that’s a positive value there. Corporate profits, so the Bloomberg consensus, we derived the implied sales growth rate. In terms of Bloomberg consensus estimates for the S&P, that number has been trending lower, that then we also derived the implied earnings growth rate for the S&P.

That number’s been trending lower as well. Analysts are expecting growth and inflation to continue slowing alongside the growth and inflation outlook itself. Fiscal policy, looking at the … fiscal balances of percentage of GDP, as I mentioned, it’s minus 7.3% in the most recent month of April. That’s the most recent one we have data for. That’s obviously trending lower and we’re blowing out our budget deficit as the function of that.

The real effective exchange rate’s been trending lower as well in terms of the dollar. So that’s the kind of, the real economy cycle obviously points to an economy that’s in what we call deflation. That’s where growth and inflation are trending lower simultaneously, and the conviction associated with that is high, given that it’s expected to remain in deflation for at least the next year.

Just pulling to those Wall Street economists’ consensus estimates in terms of the financial economy cycles. We look at monetary policy, liquidity, interest rates, and then positioning through the lens of the fear. …, we’ll start with monetary policy. We’ll start with our adjusted net liquidity model we talked about earlier, which the Fed balance sheet minus the … TGA, minus the emergency lending on the Fed’s balance sheet and the RP.

And so, that proxy’s been trending lower. We had a couple days where it looked like it was starting to trend higher, but that was right at the lows of the TGA, so that signal was not persistent. We have our global liquidity proxy as well in there as well. And our global liquidity proxy is the dollar sum of the global central bank balance sheets, global narrow money supply and global FX reserves, minus gold.

That number’s been trending lower and something I’ve been very much calling attention to at the year to date highs in Bitcoin telling investors to kind of book gains around 30 K and that turned out to be quite, quite the call. Liquidity, domestic  and euro money supply is trending lower in the US so it’s minus 9.8% year over year.

That’s the lowest number we’ve ever had in the time series. Same thing with global P weight at narrow money supply, that’s minus 2.4% year over year. It’s trending lower. It’s also the lowest zero percentile number in that time series benchmark policy rate. Obviously Fed funds rate’s been trending higher. It may start to trend sideways. I don’t expect it to. Eventually, I think there are gonna be at least another one or two rate hikes. It may come reluctantly, but I think there’s gonna have to be as we get into the second half year, two year nominal yield spread relative, to advance my policy rate.

So that’s, what are short rates pricing in relative to the Fed funds rate? That number is a minus 70 basis points and it’s been trending lower. And then when we get into our positioning indicators, we’re aggregating US dollar positioning across all the major currencies. And on a non-commercial … basis as a percent of total open interest, investors are 11% long the US dollar.

Now that number was up at like 20 something percent a few months ago back towards the dollars high. So it’s come off a bit, but it’s, right now it’s at a neutral signal in terms of the Z-score aggregated US rates, positioning, we aggregate rates across from Eurodollars all the way out to the long bond. into one signal, and that number is minus 14% in terms of non-commercial net length as a percent of open interest. That’s an extreme bear signal there. And the commodities, we aggregate commodities all across the commodities that the CFTC keeps track of. That’s a 3%, that’s an extreme bear signal. And then equities, an extreme bear signal as well in terms of position, and get minus 5% non-commercial net length.

And so we refresh this model every single day, or all these signals, these are all independent variables and they all contribute independently to each asset class based on the expected return dispersion that each signal produces. In fact you’ll see a better look at that on slide, I want to say 82.

If you, so if you just look at growth right now, growth is trending lower. And so right now it’s supplying this set of excess return dispersion to the overall signal of the model. So each independent, each asset class is independent right now. And so you would do, on that each asset class is independent.

So that process is so on and so forth, across all the different indicators in the model. And so ultimately when we go back to the main Weather model signal, right now this collection of signals, where these arrows are going up or down, the extreme positioning signals are telling you that the three month outlook for buying stocks from today, Friday, June 9th, is positive.

The three month outlook for buying bonds today, Friday, June 9^th? So September 9^th is negative dollars, negative commodities, negative Bitcoin. Doesn’t that kind of feel like the whole market right now? It, it’s been like this for about a week or so. Stock market signal was neutral prior to last Friday. We got an extreme negative signal in an equities market.

So that switched it to positive for the equity market because again, where once, actually one of the more positive signals we were contributing to this excess return dispersion for a week or so, and then we went back to contributing this excess return dispersion. And it’s obviously quite positive for the stock market.

And in terms of our Weather model signal right now, it’s saying if you’re buying the stocks with a three month, four view, it’s fine. I don’t think you’re gonna make money over the next one to two months because I think the liquidity situation here in the US with the TGA, the return of Uncle Sam, and then globally liquidity’s on the retreat as well.

You have, some adverse liquidity developments, obviously in Europe with the bank, with ECB and the Bank of England, Japan does very much, is very much not going to supply liquidity anytime soon, especially without any speculative attacks on the … control. And then lastly, we think the recent moves that the Chinese authorities have made in terms of adding incremental macro prudential measures in the easing in the real estate market.

And also, these sort of window guidance that they pushed through this week with respect to deposit rates. I don’t think there’s a big easing push on the way there either. If anything, that’s what they would led with, if that’s what they truly really wanted to do. So that’s a long-winded way of saying, let me summarize my views.

Cause you know, there’s a lot of stuff going on here. I think markets are probably gonna take a bath over the next couple of months because of the adverse liquidity developments in the US and global economy. What this Weather model signal is telling me is that three months from now, we’re probably gonna have recovered from that bath and so by the time you get into September, maybe even October, I do believe markets are likely to peak sometime in Q4, associated with our call for recession to commence sometime in Q4, maybe Q1.

And if markets peak sometime in Q4 it’s probably gonna look very blow off toppy, because that’s the history of asset markets leading up to what we call that phase two credit cycle downturn, which is the process markets take to price in the recession, which has not been priced in yet.

Sell in May and Go Away

[00:47:22]Richard Laterman: There’s an additional tailwind, from a seasonal perspective, for your call for the stock market right now. Obviously the Sell in May and Go Away adage. But we do have quite, from our perspective, from our signals there, there’s some strong data from the June through September period, really is much, much weaker for US equity. So that jives quite well with these, this additional dynamic from the TGA.

[00:47:44]Darius Dale: Yeah, absolutely. Let me just draw it. Yeah, I can draw it, draw a picture. We, you were here in the stock market, you’re probably going down here and you’re gonna recover until year end, I don’t know, year end might be too aggressive a statement. I don’t have that kind of crystal ball, but I think this is the, I think you can take this snapshot away.

I think if you’re bond investor, you’re, you’ve been going down. You’ll probably have some capitulation this summer and then that’s probably it. And then you can start rallying from there. So that’s our main view on the primary asset classes. I think Bitcoin, things that are further down on the risk curve are probably gonna struggle throughout this entire process.

Because it’s unlikely that we see any real material improvement in liquidity conditions domestically and globally. On the other side of this, you, you might just, not to mention that, might just stop getting worse.

Regulatory Hammers

[00:48:24]Richard Laterman: Not to mention the regulatory hammer has been coming down for the digital asset space in the last few weeks.

[00:48:29]Darius Dale: I’m one of the guys that thinks regulation is bullish, but this type of regulation is bearish because there’s not actual regulation. They’re just regulating by indictment. They’re not actually putting things through Congress. When they start putting things through Congress and you give people a real bounded set of outcomes, it’s gonna be extremely …

[00:48:45]Richard Laterman: Establish the guardrails and people can understand where the bright lines are, for sure.

[00:48:47]Darius Dale: Institutional investors can’t really go in size until we have those guardrails. When we get the real regulation, Bitcoin’s going into 200,000 because you have a whole set of institutional allocators that would probably like to be loaned some Bitcoin. Based on everything we’ve talked about today about the long-term future for the bond market.

They’re long, let’s say they’re obviously not, but let’s say the global … allocation is 60/40 fixed income in terms of paper assets. That’s got to go to 60/30/10. If in this world we’re talking about, where populism is really driving the boat across both sides of the aisle, you can’t be 60/40 in this world. It’s certainly at the starting point of term premium and the starting point of inflation expectations.

The Dollar

[00:49:24]Richard Laterman: It’s certainly at the starting point of term premium and the starting point of inflation expectations, without a doubt. I know we only have a few more minutes. You have a hard stop at five, so maybe if you could comment a little bit, there’s a quite nuanced view on the dollar here because I think your shorter term signals, at least from what we gathered from the materials you shared you shared with us this week, seems like there is a bit of a bullish signal on the crowning model, but then your macro Weather model is indicating this outlook that we see on the screen right now, which is a slightly more, more bear. So there’s a bit of a nuanced picture here on the dollar. Maybe you could describe it for us? Explain…

[00:49:55]Darius Dale: Yeah, absolutely. It’s our, so our research is always nuanced. So what we try to do is me, the human being, I try to come up with qualitative research views based on my understanding of all these cycles and how they interrelate to each other.

The machine, the Weather model is trying to tell me, is this a good time to be long? The thing you’re, what’s in your brain or not? And right now, the Weather model is saying the dollar, the three month outlook for the dollar is bearish. I happen to disagree with that as a human being, because the Weather model’s agnostic to understanding all these different dynamics with respect to TGA, all that stuff.

I’m over, if I was putting on a trade, I would override the Weather model to my own peril. You generally don’t want to override the Weather model. We show our back test here for, in terms of the composite signal, you’re generally making a ton of money if you’re long things that the Weather model’s bullish on, and short things that the Weather model’s bearish on, so the stock market signal, the bottom market signal, it’s the dollar signal here on the left, commodity signal on the right.

And then this thing has been right as rain on Bitcoin and these are all rolling out- of -sample back tests. Yeah, I don’t believe in sample back testing at all because this is not what we do as investors. These, this is a pretty solid, pretty solid process. There are times where the Weather model signal and the dollar is bullish and it goes down. There are times when the Weather model signal on the dollar is bearish and it goes up. And I think this is one of those times.

[00:51:03]Richard Laterman: How are your Crowding models indicating? what are they indicating from a single perspective for the dollar? I know that’s a much shorter term model, right?

[00:51:09]Darius Dale: Yeah, no signal. There’s no signal on the Crowding model unless you get an extreme dislocation, deviation, dislocation in terms of flows and an extreme dislocation in terms of momentum. The dollar hasn’t signaled in months.

Goldilocks

[00:51:21]Adam Butler: So I pulled out, I teased out one thing that I thought was interesting as well. The cross as correction risk indicator. I think there, you seem to be suggesting that we’re currently in dominant market regime as Goldilocks. But we’re creeping a little bit on some potential crash risk. Is that related to the TGA? Has that signal washed out or is that still on the radar?

[00:51:43]Darius Dale: Completely on the radar to TGA? That’s just another statistical process where we’re trying to look at the changes in our volatility. Adjustable minimum signals across all the major macro markets in the world, there’s 42 markets in that model. And based on the composition of the changes, it’s suggesting that the probability is rising that we have a risk-off event. In fact, we just crossed a threshold in this, I think earlier this week that said, okay, you need to be high on alert, high alert for having a risk off event. That’s why it’s cross asset correction risk indicate. And so I, again, that corroborates our view.

That this sort of liquidity drain both domestically and globally, that’s ongoing domestically, it’s been ongoing for a couple of months now that we’re gonna meet up with this ongoing domestic global liquidity drain, with our own liquidity drain here in the US, and that could be the, the, that could be the fundamental thing that causes Carry to be ripe.

You know what we’re always trying to do at 42 Macro is understand where we are in these different cycles, how they relate back to the market cycle. Use quantitative tools, sophisticated tools to say it’s a good time or bad time to put on that research view, in the market. You always have to separate your research from your risk management, and you should only be acting as an investor in terms of putting money to work or taking money off the table when the research and the risk management are in unison.

So right now, going back to this conversation we’re having on the dollar Weather models, bearish Darius is bullish. There should be no position. I should have no position in the dollar because our risk management signal is incongruent with our research signal. When they’re the same, you can lever up and do what, do what you do, what you please.

[00:53:07]Richard Laterman: Amazing, yeah, we’re right on. Yeah, the hour flew by. So many threads to pull on. Definitely could keep the conversation going for at least another hour, but I know you have to go. So where can people find, thank you so much, Darius. Of course. Yeah. Give us your final plug before we sign off.

Yeah. Where can they find you?

[00:53:22]Darius Dale: Absolutely. I’m the big black guy on Twitter. No, I appreciate you guys for having me, Adam, Richard, man, you guys all, like I said, you guys do great work. Love checking out your podcast. You guys have a real institutional feel to what it is that you’re doing.

So I personally like it because back in my former life I’m always, I was always traveling around the world meeting with institutional investors, and now I’m in this echo chamber, obviously we have Zoom meetings, but it’s not the same, it’s really not the same.

So the podcast really keeps you in the flow these days. And so I appreciate what you guys are doing. Hopefully folks appreciate what we’re trying to do. We’re effectively trying to bring institutional, we’re trying to bridge the gap between what the folks in London and Boston and New York and Chicago are doing, on, the, in those tall office buildings, to what investors should be doing in their own personal portfolios.

And so we’re basically trying to level the playing field by offering these very deep institutional insights to all investors of all kinds of very affordable price points. Definitely come check us out at 42 Macro. If you can’t afford our research, there’s no biggie. It’s all good. We put out a lot of free stuff to help educate our audience.

[00:54:17]Adam Butler: Amazing. You do great work, man. Thank you Darius. We’ll let you go so you can meet your appointment. We’ll have you back soon.

[00:54:21]Richard Laterman: Thanks again.

[00:54:22]Darius Dale: Awesome, man. Good weekend. Thank you guys.